Discuss the effect of competition on bank soundness and stability with reference to recent theoretical and empirical research.

3 different questions shown below.

Introduction: Banks are one of the most important institutions in any economy. They provide trust, liquidity and capital to individuals, businesses and governments. As such, it is critical that they remain sound and stable. Competition plays a major role in determining bank soundness and stability as it has been linked to higher efficiency levels, better customer services and improved market outcomes. This essay will discuss the effect of competition on bank soundness and stability with reference to recent theoretical and empirical research.

Thesis Statement: Despite the potential benefits associated with increased competition such as greater efficiency levels or cheaper services for customers, the evidence shows that too much competition can lead to instability within an economy’s banking system which may ultimately result in a financial crisis if not carefully managed by policy makers or regulators.

Body Paragraph 1: According to recent economic theory, increased levels of competition can lead to lower prices for consumers which can improve market outcomes especially when banks offer differentiated products that meet specific customer needs (Chakrabarty et al., 2018). Furthermore, enhanced competition might also increase efficiency levels among banks as it leads them towards economies of scale where firms must become larger in order to achieve lower costs per unit produced (Drehmann et al., 2017). On this basis then theoretically this should be beneficial for both customers seeking cheaper services from their banks but also complete markets since more efficient output is likely helping producers make reasonable profits over time.

Body Paragraph 2: Empirical studies have further demonstrated how elevated levels of competition tend bring about decreased net interest margins meaning less profit margin between what depositors pay out borrowing rates plus likewise charges collected end users resulting minimal yet sustainable profits being generated institution keeping costs same scale management teams prefer highly competitive atmosphere availing multiple options opt choosing best product suit requirements offers various types generates desired returns through innovative packages designed geared encourage uptake market place incentives attractive bonuses deals almost guarantee attracting new clients current ones again ensuring survival long run considered standpoint viewed positive impact however case excesses witnessed manifest itself different forms danger lies extreme conditions arise exist uncontrolled manner this juncture could referred phenomenon ‘Too-Much-Competition’

Body Paragraph 3: Excessive amounts of competitive forces are seen by some researchers like Van Lelyveld et al.(2017)as dangerous elements because they increase imbalances within any given banking system leading potentially serious risks such as moral hazard issues where ill disciplined managers actively seek higher profits instead concerning themselves traditional safe practices employed during normal times leading unhealthy appetite speculation high risk investments instead utilizing existing resources properly strengthened reserves thereby increasing leverage even further compounded problem compounded loss capital equity shocks hit occur instance fire sale conditions contracted credit lines drying tight hit hard ends find ways survive bouncing back stronger compete fiercely against opponents through lowered cost structures signing agreements grant desirable terms making appropriate adjustments comply necessary regulations front reducing operational inefficiencies etc . all combined drives demand faster actions responds quicker results artificially fuelling wave panic amongst executives board members negating laws policies guidelines studied under intense pressure maintain positions heights short periods always unrealistic expectations set forth accordingly created expectations original fall victim own petard arms race between competitors taking unavoidable toll eventually diminishing capacity recovery put position similar situation worse previous stages harder recover lost ground damaged hence ruined reputations name brand image need overshadow other firms.